Congress softens the blow: Here’s how it affects you
Federal employees and retirees are facing the most significant proposed changes to their benefits in decades. A series of sweeping proposals targeting the Federal Employees Retirement System (FERS) and associated benefits could reshape the financial future of millions of federal workers. From pension recalibrations to healthcare voucher reforms, and even the potential elimination of core benefits for future hires, the once-stable landscape of federal retirement is facing seismic shifts.
While it’s easy to feel both frustrated, angry and overwhelmed, it’s crucial to assess the actual implications. In this article, I’ll break down the proposed changes, anticipated timeline for implementation, and most importantly, what it could mean for your financial future.
Why is this happening?
The driver behind these proposed changes is House Concurrent Resolution 14 (H.Con.Res. 14), a budgetary framework aimed at cutting $ 2 trillion in federal spending over the next decade. Though the figure sounds staggering, it pales in comparison to the whopping $ 86 trillion projected to be spent over the same time. Notably, $ 50 billion of the proposed cuts target federal retirement and healthcare programs specifically.
Both chambers of Congress have passed their own versions of this bill and are currently in the reconciliation phase. The House Budget Committee failed to pass the bill at first and made significant changes to soften the blow in attempts to gain favor, leading to an approval late on May 18th. This isn’t finalized yet, so some additional changes may be made, but it’s anticipated to be voted on by both chambers in the next month. If approved, it will head to President Trump’s desk.
With so many changes being made, let’s dive into what’s still active and what’s been shelved.
What’s active:
Elimination of FERS supplement
The FERS Supplement is on the chopping block. It was created to provide Social Security-like income for eligible federal employees retiring before age 62. This income was used to bridge the gap until they are eligible to file for their actual Social Security benefits.
- FERS supplement computation: (Years of service / 40) * Social Security at 62
The proposed changes would discontinue FERS supplement for future retirees. There’s a potential exception for special groups like law enforcement officers, firefighters, and air traffic controllers but details are still pending.
- Proposed implementation date: This has been changed from being effective on the law’s enactment to January 1, 2028, and grandfather in current FERS Supplement recipients. (5 USC 8421a)
This is a HUGE victory for those who took the deferred resignation with the understanding they would receive the supplement or those who may be impacted by the ongoing reductions in force.
At-will employment or higher FERS contribution
New hires will get a choice: Pay 9.4% FERS contribution or pay 4.4% and be made “at-will.” It’s important to note that this would be a permanent election, so you can’t choose the at-will employment and then switch to the increased FERS contributions to get job security in the later years of employment.
- Proposed implementation date: The bill’s enactment date
This will make it even more difficult for federal employees to save for retirement, as it’s likely most would opt for the increased contributions over at-will employment.
Audits of participants in the FEHB program
Mandates that the Office of Personnel Management develop a process to verify family member eligibility when adding coverage, qualifying life event, or removes a family member. OPM and employing agencies would also conduct audits of FEHB-enrolled family members to ensure they are still eligible. Finally, OPM would be required to keep records of eligible family members for a specified time period and to include a fraud risk assessment.
$ 350 fee to file appeals with the Merit Systems Protection Board
This would be a reimbursable fee if a claim or appeal is successful. This covers the federal district court filings under Section 1914(a) of Title 28.
What’s inactive (for now):
Reduction/elimination of COLA
Now for some good news! The proposal to reduce or eliminate cost-of-living adjustments (COLAs) for FERS retirees was shelved, for now. This would have been the most harmful change of the entire proposal, so for now, this is a sigh of relief.
The FERS annuity, while not tied to inflation, does a great job of keeping up — something that differentiates it from other sources like private annuities.
Current policy:
| Inflation (CPI Index) | COLA |
| Under 2.0% | Same as CPI |
| 2.0 – 3.0% | 2.0% |
| Above 3.0% | CPI minus 1.0% |
For comparison, private annuities typically charge an extra fee, known as a rider, for inflationary adjustments — something that could be a decision at retirement in the future, much like having a cost to add a survivor benefit.
Increased FERS contributions
More good news! In the latest revision on May 18th, the new provision to force current federal employees to increase their FERS contribution to 4.4% was also shelved. However, it’s still important to understand what was being proposed as this could also resurface in the future.
Current system:
| Retirement System | Hire Date | Employee Contribution |
| FERS | Before 2013 | 0.8% |
| FERS-RAE | During 2013 | 3.1% |
| FERS-FRAE | After 2013 | 4.4% |
Example: To illustrate the cost, here’s a simple projection assuming a $ 100,000 salary, 2% annual COLA for salary, and no step increases or promotions. Additionally, let’s assume we invest that additional FERS contribution and earn a modest 5% per year.
| Year | Salary | Additional Cost (3.6%) | Opportunity Cost (5% return/year) |
| 1 | $ 100,000 | $ 3,600 | $ 3,600 |
| 2 | $ 102,000 | $ 3,672 | $ 7,636 |
| 3 | $ 104,040 | $ 3,745 | $ 11,950 |
| 4 | $ 106,121 | $ 3,820 | $ 16,559 |
| 5 | $ 108,243 | $ 3,897 | $ 21,479 |
| 6 | $ 110,408 | $ 3,975 | $ 26,726 |
| 7 | $ 112,616 | $ 4,054 | $ 32,319 |
| 8 | $ 114,869 | $ 4,135 | $ 38,277 |
| 9 | $ 117,166 | $ 4,218 | $ 44,620 |
| 10 | $ 119,509 | $ 4,302 | $ 51,368 |
Over a decade, that’s nearly $ 40,000 in added cost. Not to mention, if you were to invest those funds at a 5% rate of return, you’d have over $ 51,000.
High-3 to high-5 salary
Currently, FERS annuities are based on your “High-3” average salary. This would be the highest-paid, consecutive 36 months of basic pay during your federal career. The proposed change would shift this to be based on your “High-5” average salary. A high-5 change would affect you the most if you’ve had step increases or a promotion recently as well as during periods of time with higher salary COLAs. Law enforcement officers are expected to be exempt and remain on the high-3 pension structure.
- Proposed implementation date: Originally January 1, 2027 but changed to January 1, 2028, then finally shelved on May 21st.
- Example: Let’s look at the impact in an example. Assuming someone earned a $ 100,000 salary in 2020 and had no step increases over the past 5 years.
FEHB voucher system
This was retracted on the House Committee meeting on April 30th. According to the Committee for a Responsible Federal Budget, they estimate this change would save $ 20 billion between 2026 and 2035.
Currently, the federal government covers approximately 72% of Federal Employee Health Benefit (FEHB) premiums. Under the previously proposed change, this system would be replaced with a voucher model, where the government provides a fixed-dollar contribution that increases only with general inflation. Since healthcare costs typically rise faster (~5% annually) compared to general inflation (~2.5% annually), this means the government’s share will shrink over time.
While the impact may not be immediate, the government’s contribution will gradually erode over time, leading to higher out-of-pocket costs in the future, especially in the years when you may need healthcare the most.
This makes a case that more federal employees should reconsider combining FEHB with Medicare Part B. This is a topic for another day but if you haven’t enrolled and you’re passed eligibility requirements, please be aware of the penalties.
There’s a 10% permanent penalty for each year you delayed Part B enrollment after when you were first eligible.
G Fund reform
The G Fund, widely known for its steady returns, may undergo a structural reform. The new proposal would change the composition of the G Fund to mirror short-term Treasury bills. This would slightly expose it to market volatility, varying returns, and while rare, the potential for a negative year.
This could change the foundation of retirement investing for many within the TSP. Additionally, one may want to reconsider the use of lifecycle funds due to the high concentration of G fund in the closer target date years such as L Income or L 2030.
What should you do now?
- Monitor legislative developments: Final reconciliation votes are expected in the next few couple of months, if not sooner.
- Run retirement scenarios: Evaluate early retirement options before certain rule changes may take effect.
- Re-evaluate your investment strategy: With potential for less pension and higher healthcare costs, you may need to evaluate your investment risk.
- Review Medicare decisions: If you’re near or above age 65, revisit your strategy for Medicare Part B and FEHB in case FEHB changes to a voucher system in the future.
- Talk to a specialist: These changes are complex. Work with a federal retirement expert who can customize a plan for your situation and evaluate your options for you.
Final thoughts
The proposed reforms represent a turning point. What was once considered a stable and secure retirement system is now subject to significant fiscal pressures and political trade-offs. While the current proposal has been softened, the message is clear: Federal benefits are no longer safe.
While we may be safe for now, the inclusion of some of these items in the initial draft suggests they could resurface in future negotiations. Namely, the high-3 to high-5 salary, reduction/elimination of the COLA on FERS/CSRS annuities, increased FERS contributions, FEHB voucher system, and G Fund reform. It’s also worth noting the House Committee was supposed to cut $ 50 billion from federal benefits and the changes listed above would be closer to $ 15 billion.
With that, proactive planning is not just smart; it’s essential. Be sure to build flexibility into your retirement plan, stress-test it against multiple outcomes, and prepare not just for what is, but for what may come. The best defense against these systemic shifts is to have a plan.
David Setia is the founder and a financial advisor with FedWise Advisors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
The post Congress softens the blow: Here’s how it affects you first appeared on Federal News Network.